Let’s start with what some of you already know……..foreclosures are on the rise. Incredibly, this is happening before huge special assessments are kicking in for many of you and before mandatory reserves go into effect. If foreclosures are already on the rise, what’s going to happen when special assessments and reserves take hold of most communities?

If a bank forecloses on either a home in an HOA or on a unit in a condominium, the association is likely to take a huge financial hit if that home or unit is also delinquent to the association. When a bank forecloses on a property, most of the time that bank winds up becoming the owner of that property because nobody bids against the bank at a foreclosure sale. For example, if an owner fails to pay the mortgage, the bank eventually forecloses and gets a final judgment against the owner for the amount of the delinquency plus interest and attorney’s fees. The judge sets an auction date. At the auction, the bank usually bids the amount of their final judgment, there are no other bids and the bank winds up owning the property.

Now that the bank owns the property, do they have to pay all of the assessments that are owed to the association on that home or condominium unit? Not even close. The law states that the bank would only have to pay the lesser of:

One year of assessments or;

One percent of the original mortgage debt;

So, let’s say the bank is foreclosing on a $300,000.00 mortgage. One percent of that mortgage is $3,000.00. Let’s say the assessments are $600.00 per month. One year of assessments is $7,200.00. Therefore, at most the bank is responsible for $3,000.00 and not $7,200.00 and this is even if the prior owner has not paid for several years. There can be $15,000.00 in delinquent assessments owed on the unit —the bank would still only have to pay $3,000.00 at most.

Here’s where the association can really get stung. If the governing documents let the bank off the hook and state that the bank does not have to pay anything if they wind up foreclosing and owning the property. Even though the law would require the bank to pay $3,000.00 in the above example, the association’s governing documents may allow the bank to pay zero! SO……………MAKE SURE YOUR GOVERNING DOCUMENTS DO NOT CONTAIN SUCH A PROVISION AND IF THEY DO – AMEND IT IMMEDIATELY BEFORE FORECLOSURES IN YOUR COMMUNITY POSSIBLY BECOME ROUTINE! DON’T LET THE BANKS OFF THE HOOK!

Next week we’ll talk about what happens when a third party buys the property at a foreclosure sale and not the bank. You definitely will want to find out the good and the potential for disaster